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CHAPTER 13
QUESTIONS
•

1. The basic rights of common stockholders,
unless otherwise restricted in the articles of
incorporation or bylaws, are as follows:
(a) The right to vote in the election of directors and in the determination of certain
corporate policies.
(b) The right to maintain one’s proportional
interest in the corporation through purchase of additional stock issued by the
company. (In recent years, some states
have eliminated this preemptive right.)

•
•
•
•

To reduce the amount of equity outstanding
To invest excess cash temporarily
To protect against a hostile takeover
To improve per-share earnings
To display confidence that the stock is
currently undervalued

7. a. The cost method of accounting for
treasury stock records the treasury
stock at cost, pending final disposition

of the stock; the par value method
treats the acquisition of treasury stock
as effective or “constructive” retirement
of outstanding stock.

2. Historically, par value was equal to the
market value of the shares at issuance. Par
value was also sometimes viewed by the
courts as the minimum contribution by investors. These days, par values for common stocks are usually set at very low values (less than $1), so the importance of par
value has decreased substantially.

b. Total stockholders’ equity will be the
same regardless of whether the cost
method or the par value method is
used to account for treasury stock. The
respective amounts of retained earnings and paid-in capital may differ,
however.

3. Preferred stock is stock that carries certain
preferences over common stock, such as
prior claims to dividends and liquidation
preferences. Often, preferred stock has no
voting rights or only limited voting rights,
and dividends are usually limited to a
stated percentage or amount. The special
rights of a particular issue of preferred
stock are set forth in the articles of incorporation and in the preferred stock certificates
issued by the corporation.

8. The difference between the purchase price

and the selling price of treasury stock is
properly excluded from the income statement because treasury stock transactions
cannot be considered to give rise to a gain
or a loss. Gain or loss arises from the utilization of assets or resources by the corporation in operating and investing activities.
Because the recognition of treasury stock
as an asset is discouraged, transactions in
treasury stock are considered capital transactions between the company and its
stockholders and thus do not give rise to a
gain or a loss.

4. User comments to the FASB’s November
2007 Preliminary Views document were
overwhelmingly negative. Users appear to
prefer that preferred stock be classified as
equity in the balance sheet.

9. If warrants are detachable, the issuance
proceeds are allocated between the security and the warrant, based on the relative
fair market values of each. If warrants are
nondetachable, no allocation is made to
recognize the value of the warrant. The entire proceeds are assigned to the security
to which the warrant is attached.

5. When stock is issued for noncash assets or
for services, the fair market value of the
stock or the fair market value of the property or services, whichever is more objectively determinable, is used to record the
transaction.
6. A company may repurchase its own stock
for any of the following reasons:
•

To provide shares for incentive compensation plans
•
To obtain shares for convertible securities holders

10. The option value used in the computation
of compensation expense associated with a
basic stock-based compensation plan is the

541


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542

estimated fair value of the option on the
grant date.
11. The catch-up adjustment causes the cumulative expense recognized to equal the
amount it would have been had the revised
number of options probable to vest been
used all along in the yearly computations of
expense.
12. When a stock-based award calls for settlement in cash, the obligation is accounted
for as a liability.
13. Mandatorily redeemable preferred shares
should be reported in the balance sheet as
a liability.
14. When a corporation writes a put option on
its own shares, the corporation typically receives cash. In return, the corporation

agrees to repurchase shares of its own
stock at a set price at some future date if
those shares are offered for sale by the option holder.
15. An obligation that requires a company to
deliver a fixed number of its shares should
be classified as equity because the party to
whom the shares must be delivered is at risk
to the same extent as are the existing
shareholders. An obligation to deliver shares
with a fixed monetary amount is reported as
a liability rather than as equity.
16. Noncontrolling interest is the amount of
equity investment made by outside shareholders to consolidated subsidiaries that
are not 100% owned by the parent. Historically, noncontrolling interest has been
called minority interest. Noncontrolling interest is classified as equity in the consolidated balance sheet.
17. If an error is discovered in the current year,
it is corrected with a correcting entry. If a
material error is discovered in a year subsequent to the error, the error is corrected
by a prior-period adjustment whereby the
beginning balance in Retained Earnings is
adjusted. Some errors are counterbalancing (e.g., inventory errors) and may need
no correction.
18. State incorporation laws are written to prevent corporations from wrongfully borrowing money and then funneling that money
to shareholders. One device to prevent this
is to restrict the payment of cash dividends

to the amount of retained earnings. Retained earnings can also be restricted by
private debt agreements in which lenders
constrain the ability of a borrowing company to pay cash dividends.
19. a. June 15, 2013, is the date on which dividend action was formally taken. July 10,

2013, is the date dividend checks will be
mailed to stockholders. June 30, 2013,
is the date for determining the names of
stockholders for purposes of the dividend; dividend checks will be mailed
only to those stockholders whose
names appear in the stockholders’
ledger at the close of business on this
date. The period between the date of
declaration and the date of record gives
stockholders a chance to adjust their
holdings in light of the dividend action
taken by the company. The period between the date of record and the date
of payment gives the corporation time
to prepare dividend checks for mailing.
b. The stock would normally be traded
“ex-dividend” three or four days prior to
June 30, 2013. A stockholder selling
shares on or after that date would still
receive the dividend on stock, and conversely, any person acquiring the stock
between that date and July 10 would
receive no dividend payment from the
current declaration.
20. With a stock split, the par value of each
share is reduced, and the number of shares
outstanding is increased. The total par
value of shares is unchanged. With a stock
dividend, the par value of each share is unchanged, and because the number of
shares outstanding is increased, total par
value is increased. This par value increase
is effected through a transfer to par value

from Retained Earnings and/or Additional
Paid-In Capital. With a small stock dividend, the market value of the newly issued
shares is transferred. With a large stock
dividend, the par value of the new shares is
transferred.
21. a. A liquidating dividend is a distribution of
contributed capital to stockholders.
b. A liquidating dividend is paid when a
corporation is undertaking a partial or
complete liquidation.


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22. The three types of unrealized gains and
losses shown as direct equity adjustments
are
•
Foreign currency translation adjustment. This adjustment arises from the
change in the equity of foreign subsidiaries (as measured in terms of U.S.
dollars) that occurs as a result of
changes in foreign currency exchange
rates.
•
Unrealized gains and losses on availablefor-sale securities. Available-for-sale securities are those that were not purchased with the immediate intention to
resell but will be held for an indefinite
time. Unrealized gains and losses arise
because these securities must be re-


543

•

ported on the balance sheet at their fair
market value.
Unrealized gains and losses on derivatives. Unrealized gains and losses from
market value fluctuations of derivative
instruments that are intended to manage risks associated with future sales
or purchases are deferred to allow for
proper matching.

23. Each equity reserve account is associated
with legal restrictions dictating whether it
can be distributed to shareholders. Therefore, the accounting for equity reserves directly influences a firm’s ability to pay dividends. The most important distinction is
whether the equity reserve is part of distributable or nondistributable equity.


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544

PRACTICE EXERCISES
PRACTICE 13–1 COMPUTATION OF DIVIDENDS, COMMON AND PREFERRED
(1)

(2)

Noncumulative

2012:
Preferred shareholders
(10,000 shares × 0.06 ×
$100 = $60,000)

Amount
$55,000

Comments
No dividends in arrears; noncumulative

Common shareholders

0
$55,000

No remainder

2013:
Preferred shareholders

Amount
$ 60,000

Common shareholders

47,000
$107,000

Cumulative

2012:
Preferred shareholders
(10,000 shares × 0.06 ×
$100 = $60,000)

Comments
No dividends in arrears; noncumulative

Amount
$55,000

Comments
$5,000 dividends in arrears

Common shareholders

0
$55,000

No remainder

2013:
Preferred shareholders

Amount
$ 65,000

Common shareholders

42,000

$107,000

Comments
$5,000 in arrears + $60,000

PRACTICE 13–2 ISSUANCE OF COMMON STOCK
Cash (10,000 shares × $40) .................................................
Common Stock, $1 par (10,000 shares × $1) ...............
Paid-In Capital in Excess of Par ...................................

400,000
10,000
390,000

PRACTICE 13–3 ACCOUNTING FOR STOCK SUBSCRIPTIONS
Subscription:
Common Stock Subscriptions Receivable........................
Common Stock Subscribed ..........................................
Paid-In Capital in Excess of Par ...................................
Subscription amount = 20,000 shares × $25 = $500,000

500,000
20,000
480,000


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PRACTICE 13–3 (Concluded)
Collection of initial 40% of the cash:
Cash ($500,000 × 0.40).........................................................
Common Stock Subscriptions Receivable ..................

200,000
200,000

Collection of remaining cash and issuance of shares:
Cash ($500,000 – $200,000).................................................
Common Stock Subscriptions Receivable ..................

300,000

Common Stock Subscribed ................................................
Common Stock, $1 par (20,000 shares × $1) ...............

20,000

300,000
20,000

PRACTICE 13–4 ISSUING STOCK IN EXCHANGE FOR SERVICES
Salaries Expense .................................................................
Common Stock, $0.50 par (35,000 shares × $0.50) .....
Paid-In Capital in Excess of Par ...................................

623,000
17,500

605,500

Paid-In Capital in Excess of Par = $623,000 − $17,500 = $605,500
PRACTICE 13–5 ACCOUNTING FOR TREASURY STOCK: COST METHOD
Treasury Stock .....................................................................
Cash.................................................................................

300,000
300,000

$300,000/10,000 shares = $30 per share
Cash ......................................................................................
Treasury Stock (4,000 shares × $30) ............................
Paid-In Capital from Treasury Stock ............................

144,000
120,000
24,000

PRACTICE 13–6 ACCOUNTING FOR TREASURY STOCK: PAR VALUE METHOD
Treasury Stock (10,000 shares × $1 par) ...........................
Paid-In Capital in Excess of Par .........................................
Retained Earnings ($300,000 − $200,000) ..........................
Cash.................................................................................

10,000
190,000
100,000
300,000


Paid-In Capital in Excess of Par = 10,000 shares × ($20 – $1 par) = $190,000
Cash ......................................................................................
Treasury Stock ...............................................................
Paid-In Capital in Excess of Par ...................................

144,000
4,000
140,000


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PRACTICE 13–7 ACCOUNTING FOR STOCK WARRANTS
Cash (40,000 units × $55) ....................................................
Preferred Stock, $50 par (40,000 shares × $50)...........
Paid-In Capital in Excess of Par⎯Preferred................
Common Stock Warrants (40,000 warrants × $3)........

2,200,000
2,000,000
80,000
120,000

Paid-In Capital in Excess of Par—Preferred = 40,000 shares × [($55 – $3) – $50 par]
= $80,000
In this case, because the fair values of the separate components of the preferred
stock/stock warrant package sum to the fair value of the package ($52 + $3 = $55),

there is no need to use the relative fair value method.
Cash (40,000 warrants × $20)..............................................
Common Stock Warrants (40,000 warrants × $3) .............
Common Stock, $1 par ..................................................
Paid-In Capital in Excess of Par⎯Common ................

800,000
120,000
40,000
880,000

PRACTICE 13–8 ACCOUNTING FOR A BASIC STOCK-BASED COMPENSATION
PLAN
Grant Date:
No entry.
End of First Year:
Compensation Expense ($600,000/3 years) ......................
Paid-In Capital from Stock Options ..............................

200,000
200,000

Total compensation over the 3-year life of the options: 150,000 options × $4 =
$600,000
The same adjusting entry would be made at the end of the second and the third
years.
Option Exercise Date:
Cash (150,000 options × $25)..............................................
Paid-In Capital from Stock Options....................................
Common Stock, $1 par (150,000 shares × $1) .............

Paid-In Capital in Excess of Par ...................................

3,750,000
600,000
150,000
4,200,000

PRACTICE 13–9 ACCOUNTING FOR A PERFORMANCE-BASED STOCK OPTION
PLAN
End of First Year:
Compensation Expense ($600,000/3 years) ......................
Paid-In Capital from Stock Options ..............................

200,000
200,000

Total probable compensation over the 3-year life of the options: 150,000 options × $4
= $600,000


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PRACTICE 13–9 (Concluded)
End of Second Year:
Compensation Expense ($320,000 – $200,000).................
Paid-In Capital from Stock Options ..............................


120,000
120,000

Total probable compensation over the 3-year life of the options: 120,000 options × $4
= $480,000
Cumulative expense as of the end of the second year: $480,000 × 2/3 = $320,000
PRACTICE 13–10 ACCOUNTING FOR CASH STOCK APPRECIATION RIGHTS
End of First Year:
Compensation Expense ($1,200,000/3 years) ...................
Share-Based Compensation Liability...........................

400,000
400,000

Total estimated compensation over the 3-year life of the options: 150,000 options ×
$8 = $1,200,000
End of Second Year:
Compensation Expense ($500,000 – $400,000).................
Share-Based Compensation Liability...........................

100,000
100,000

Total estimated compensation over the 3-year life of the options: 150,000 options ×
$5 = $750,000
Cumulative expense as of the end of the second year: $750,000 × 2/3 = $500,000
PRACTICE 13–11 ACCOUNTING FOR MANDATORILY REDEEMABLE PREFERRED
SHARES
January 1, Year 1
Cash ......................................................................................

Mandatorily Redeemable Preferred Shares (liability) .

2,000

December 31, Year 1
Interest Expense ($2,000 × 0.08).........................................
Mandatorily Redeemable Preferred Shares (liability) .

160

December 31, Year 2
Interest Expense ($2,160 × 0.08).........................................
Mandatorily Redeemable Preferred Shares (liability) .

172.80

January 1, Year 3
Mandatorily Redeemable Preferred Shares (liability).......
Cash.................................................................................

2,332.80

2,000

160

172.80

2,332.80



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548

PRACTICE 13–12 ACCOUNTING FOR A WRITTEN PUT OPTION
January 1, Year 1
Cash ......................................................................................
Put Option (liability) .......................................................

1,200

December 31, Year 1
Put Option (liability) ($1,200 – $350) ..................................
Gain on Put Option.........................................................

850

December 31, Year 2
Treasury Stock ($46 × 100 shares) .....................................
Put Option (liability) .............................................................
Loss on Put Option..............................................................
Cash ($50 × 100 shares).................................................

4,600
350
50

1,200


850

5,000

PRACTICE 13–13 ACCOUNTING FOR STOCK CONVERSION
Preferred Stock, $40 par (12,000 shares × $40) ................
Paid-In Capital in Excess of Par⎯Preferred .....................
Common Stock, $1 par (60,000 shares × $1) ...............
Paid-In Capital in Excess of Par⎯Common ................

480,000
48,000
60,000
468,000

PRACTICE 13–14 PRIOR-PERIOD ADJUSTMENTS
Retained earnings, unadjusted beginning balance ..............
Add prior-period adjustment ...................................................
Retained earnings, adjusted beginning balance ...................
Add: Net income .......................................................................
Deduct: Dividends ....................................................................
Retained earnings, ending balance ........................................

$42,000
4,000
$46,000
12,000
$58,000
4,500

$53,500

PRACTICE 13–15 ACCOUNTING FOR DECLARATION AND PAYMENT OF DIVIDENDS
Dividends (or Retained Earnings) ......................................
Dividends Payable..........................................................

35,000

Dividends Payable ...............................................................
Cash.................................................................................

35,000

35,000
35,000


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PRACTICE 13–16 ACCOUNTING FOR PROPERTY DIVIDENDS
Dividends (or Retained Earnings) ......................................
Property Dividends Payable (10,000 shares × $20).....
Gain on Distribution of Property Dividend ..................

270,000
200,000
70,000


Gain on distribution of property dividend: 10,000 shares × ($27 – $20) = $70,000
Property Dividends Payable ...............................................
Investment Securities—Wilsonville Company ............

200,000
200,000

PRACTICE 13–17 ACCOUNTING FOR SMALL STOCK DIVIDENDS
Retained Earnings ...............................................................
Stock Dividends Distributable (4,000 shares × $1) .....
Paid-In Capital in Excess of Par ...................................

160,000
4,000
156,000

Reduction in retained earnings: 40,000 shares × 0.10 × $40 = $160,000
Stock Dividends Distributable ............................................
Common Stock, $1 par ..................................................

4,000
4,000

PRACTICE 13–18 LARGE STOCK DIVIDENDS AND STOCK SPLITS
(1)

100% Large Stock Dividend:
Retained Earnings* ...........................................................
Stock Dividends Distributable (10,000 shares × $1)


10,000
10,000

Reduction in retained earnings: 10,000 new shares × $1 = $10,000
*Alternatively, the debit can be made to Paid-In Capital in Excess of Par.
Stock Dividends Distributable .........................................
Common Stock, $1 par................................................
(2)

10,000
10,000

2-for-1 Stock Split:
There are no journal entries necessary with a stock split. In this case, only a
memorandum entry would be made to note the fact that the par value per share
had been reduced to $0.50 and the number of shares outstanding had been increased to 20,000.

PRACTICE 13–19 ACCOUNTING FOR LIQUIDATING DIVIDENDS
Dividends (or Retained Earnings) ...................................
Paid-In Capital in Excess of Par ......................................
Dividends Payable.......................................................

30,000
470,000

Dividends Payable ............................................................
Cash..............................................................................

500,000


500,000
500,000


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550

PRACTICE 13–20 COMPREHENSIVE INCOME

Net income (loss)..............................................
Increase (decrease) from foreign currency....
Increase (decrease) in portfolio value ............
Comprehensive income ................................

2011
$(1,500)
320
(900)
$(2,080)

2012
$ 600
(680)
(400)
$(480)

2013

$2,100
(170)
560
$2,490

PRACTICE 13–21 ACCUMULATED OTHER COMPREHENSIVE INCOME
(1) Retained earnings
Retained earnings, January 1, 2011................................................
Net loss..............................................................................................
Dividends...........................................................................................
Retained earnings (deficit), December 31, 2011............................
Net income ........................................................................................
Dividends...........................................................................................
Retained earnings (deficit), December 31, 2012............................
Net income ........................................................................................
Dividends...........................................................................................
Retained earnings (deficit), December 31, 2013........................

$
0
(1,500)
0
$(1,500)
600
(150)
$(1,050)
2,100
(550)
$ 500


(2) Accumulated other comprehensive income
Accumulated other comprehensive income, January 1, 2011 .....
Increase (decrease) from foreign currency ...................................
Increase (decrease) in portfolio value ............................................
Accumulated other comprehensive income (deficit),
December 31, 2011 .......................................................................
Increase (decrease) from foreign currency ...................................
Increase (decrease) in portfolio value ............................................
Accumulated other comprehensive income (deficit),
December 31, 2012 .......................................................................
Increase (decrease) from foreign currency ...................................
Increase (decrease) in portfolio value ............................................
Accumulated other comprehensive income (deficit),
December 31, 2013...................................................................

$

0
320
(900)

$ (580)
(680)
(400)
$(1,660)
(170)
560
$(1,270)



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551

PRACTICE 13–22 INTERNATIONAL EQUITY RESERVES
(1) Nondistributable
Par value of shares...........................................................................
Share premium .................................................................................
Asset revaluation reserve................................................................
Total nondistributable equity ......................................................

$ 100
1,700
3,200
$ 5,000

(2) Distributable
Retained earnings ............................................................................
Special reserve .................................................................................
Total distributable equity.............................................................

$ 1,000
400
$ 1,400

PRACTICE 13–23 STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Common
Stock
at Par

Begin $ 2,000

Paid-In
Capital
in Excess
of Par
$ 14,000

Accumulated
Other
Comprehensive Treasury
Income
Stock
$(3,500)
$(6,000)

(a)

Retained
Earnings
$18,000

6,300

(b)

200

$ 6,500


(c)

(2,000)

(d)

End

$ 6,300
200

Comprehensive income

(e)

Total
Stockholders’
Equity
$ 24,500

(1,600)
50

750

$2,050

$ 14,750

$ (2,000)

(1,600)
800

$(3,300)

$(7,600)

$22,300

$28,200


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552

EXERCISES
13–24.

(a)

(b)

(c)

(d)

(e)


(f)

Cash..............................................................................
Common Stock........................................................
Paid-In Capital in Excess of Par ............................
Issued 20,000 shares of $2 par common
stock at $30.

600,000

Organization Expense ................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par ............................
Issued 250 shares of $2 par common stock in
return for legal services in organizing
corporation.

9,000

Compensation Expense .............................................
Common Stock........................................................
Paid-ln Capital in Excess of Par ............................
Issued 300 shares of $2 par common stock
to employees; objective market value
of stock = $10,000.

10,000

Buildings ......................................................................
Land..............................................................................

Common Stock........................................................
Paid-In Capital in Excess of Par ............................
Issued 12,500 shares of $2 par common stock
in exchange for a building and land valued
at $295,000 and $80,000, respectively.

295,000
80,000

Cash..............................................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par ............................
Issued 6,500 shares of $2 par common stock
at $38.

247,000

Cash..............................................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par ............................
Issued 4,000 shares of $2 par common stock
at $45.

180,000

40,000
560,000

500
8,500


600
9,400

25,000
350,000

13,000
234,000

8,000
172,000


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13–25.

553

December 31, 2011, Dividend:
Because no preferred stock had been issued at this time, the entire
$24,200 dividend was paid to the common stockholders.
December 31, 2013, Dividend:
Because cumulative preferred stock had been issued, the preferred
stockholders have the right to receive $17,500 in dividends before
common stockholders receive payment. (25,000 shares × $10 par =
$250,000; $250,000 × 0.07 = $17,500) Thus, the entire $16,500 was paid to
preferred stockholders.

December 31, 2014, Dividend:
Because preferred stockholders had not received all dividends they
were entitled to on December 31, 2013, the remaining portion of the
2013 dividend plus the preference for 2014 must be paid to preferred
stockholders before any payment to common stockholders. Thus, preferred stockholders will receive $18,500 in 2014, and common stockholders will receive $22,800 ($17,500 – $16,500 = $1,000; $1,000 +
$17,500 = $18,500; $41,300 – $18,500 = $22,800).

13–26.

2011

2012

2013

Preferred
Stock

$90,000
= $9.00
10,000

$90,000
= $9.00
10,000

$90,000
= $9.00
10,000


Common
Stock

$60,000
= $0.20
300,000

$150,000
= $0.50
300,000

$470,000
= $1.57
300,000

Preferred
Stock

$150,000
= $7.50
20,000

$180,000
= $9.00
20,000

$180,000
= $9.00
20,000


Common
Stock

None

$60,000
= $0.24
250,000

$380,000
= $1.52
250,000

Preferred
Stock

$150,000
= $7.50
20,000

$210,000
= $10.50
20,000

$180,000
= $9.00
20,000

Common
Stock


None

$30,000
= $0.12
250,000

$380,000
= $1.52
250,000

Preferred
Stock

$150,000
= $5.00
30,000

$240,000
= $8.00
30,000

$420,000
= $14.00
30,000

Common
Stock

None


None

$140,000
= $0.56
250,000

(a)

(b)

(c)

(d)


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554

13–27.

13–28.

(a) Cash.............................................................................. 518,000
Common Stock........................................................
84,000
Paid-ln Capital in Excess of Stated
Value—Common ..................................................

434,000
Issued 14,000 shares of common stock, stated
value $6, at $37.
Cash..............................................................................
Preferred Stock .......................................................
Paid-ln Capital in Excess of Par—Preferred ........
Issued 5,000 shares of preferred stock, par
value $20, at $25.

125,000

(b) Cash..............................................................................
Common Stock Subscriptions Receivable...............
Common Stock Subscribed ...................................
Paid-ln Capital in Excess of Stated
Value—Common ..................................................
Received subscriptions for 3,000 shares of
common stock, stated value $6, at $41.

30,750
92,250

(c) Cash..............................................................................
Common Stock Subscriptions Receivable...........
Collected remaining amount owed on stock
subscriptions.

92,250

Common Stock Subscribed .......................................

Common Stock........................................................
Issued 3,000 shares of subscribed stock.

18,000

(d) Cash..............................................................................
Common Stock........................................................
Paid-ln Capital in Excess of Stated
Value—Common ..................................................
Issued 8,000 shares of common stock at $53.

424,000

2013
Aug. 1

Dec. 31

100,000
25,000

18,000
105,000

92,250

18,000

48,000
376,000


Common Stock.................................................
Paid-ln Capital in Excess of Par .....................
Retained Earnings ...........................................
Cash ..............................................................
*Alternatively, the entire $399,000 could be
debited to Retained Earnings.

21,000
252,000*
126,000*
399,000

Common Stock.................................................
Paid-ln Capital in Excess of Par .....................
Cash ..............................................................
Paid-ln Capital from Stock Reacquisition .

34,000
408,000
306,000
136,000


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13–29.

555


1. (a) 2013
June 1 Treasury Stock ........................................... 240,000
Cash ........................................................
240,000
Reacquired 15,000 shares of
common at $16.
July 1 Cash............................................................. 100,000
Treasury Stock .......................................
80,000
Paid-ln Capital from Treasury Stock....
20,000
Sold 5,000 shares of treasury
stock at $20; cost $16.
Aug. 1 Cash.............................................................
98,000
Paid-ln Capital from Treasury Stock ........
14,000*
Treasury Stock .......................................
112,000
Sold 7,000 shares of treasury
stock at $14; cost $16.
*Alternatively, Retained Earnings could be
debited for $14,000.
Sept. 1 Common Stock...........................................
1,000
Paid-ln Capital in Excess of Par ...............
16,000*
Treasury Stock .......................................
16,000

Paid-ln Capital from Treasury Stock....
1,000
Retired 1,000 shares of treasury
stock, cost $16; pro rata issuance
cost, $17.
[($240,000 + $3,840,000) ÷ 240,000 shares].
*Alternatively, Retained Earnings could be debited for
$15,000, with no entries to paid-in capital accounts.
(b)

Stockholders’ Equity
Contributed capital:
Common stock, $1 par, 275,000 shares authorized;
239,000 shares issued; 2,000 shares held as
treasury stock.........................................................
Paid-in capital in excess of par ...............................
Paid-in capital from treasury stock.........................
Retained earnings .........................................................
Total contributed capital and retained earnings........
Less: Treasury stock at cost .......................................
Total stockholders’ equity............................................

$ 239,000
3,824,000
7,000
1,005,000
$5,075,000
32,000
$5,043,000


2. (a) 2013
June 1 Treasury Stock ...........................................
15,000
Paid-ln Capital in Excess of Par ............... 240,000
Paid-ln Capital from Treasury Stock....
15,000
Cash ........................................................
240,000
Reacquired 15,000 shares at $16; par value, $1;
pro rata cost, $17.


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556

13–29. (Concluded)

(b)

13–30.

July 1 Cash.............................................................
Treasury Stock .......................................
Paid-ln Capital in Excess of Par ...........
Sold 5,000 shares at $20; par
value, $1.

100,000


Aug. 1 Cash.............................................................
Treasury Stock .......................................
Paid-In Capital in Excess of Par ...........
Sold 7,000 shares at $14; par
value, $1.

98,000

Sept. 1 Common Stock...........................................
Treasury Stock .......................................
Retired 1,000 shares; par value, $1.

1,000

5,000
95,000

Stockholders’ Equity
Contributed capital:
Common stock, $1 par, 275,000 shares authorized;
239,000 shares issued; 2,000 shares held as
treasury stock....................................................
Less: Treasury stock at par ................................
Common stock outstanding................................
Paid-in capital in excess of par ..........................
Paid-in capital from treasury stock ....................
Total contributed capital .....................................
Retained earnings ................................................
Total stockholders’ equity...................................


7,000
91,000

1,000

$ 239,000
2,000
$ 237,000
3,786,000
15,000
$4,038,000
1,005,000
$5,043,000

When the rights are issued, only a memorandum entry is required to state
the number of shares that may be claimed. This is to ensure that enough
shares are held to cover the rights.
When the rights are exercised, another memorandum entry is needed to
record the reduction in the outstanding rights.
When the rights lapse, a memorandum entry should be made to note the
decrease in outstanding claims to common stock.

13–31.

1. Cash ................................................................................ 135,000
Common Stock Warrants..........................................
12,926*
Preferred Stock ..........................................................
30,000†

Paid-ln Capital in Excess of Par—Preferred ...........
92,074†
*Value assigned to warrants:
($9/$94) × $90 × 1,500 = $12,926 (rounded)
†
Value assigned to preferred stock:
($85/$94) × $90 × 1,500 = $122,074 ($30,000 par, $92,074 paid-in
capital)


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557

13–31. (Concluded)

13–32.

2. Common Stock Warrants ...................................................
Cash .....................................................................................
Common Stock ...............................................................
Paid-ln Capital in Excess of Par—Common.................

12,926
45,000

3. Common Stock Warrants ...................................................
Cash .....................................................................................
Common Stock ...............................................................

Paid-ln Capital in Excess of Par—Common.................
*0.70 × $12,926 = $9,048 (rounded)

9,048*
31,500

Common Stock Warrants ...................................................
Paid-ln Capital from Expired Common Stock
Warrants .......................................................................
*0.30 × $12,926 = $3,878 (rounded)

3,878*

3,000
54,926

2,100
38,448

3,878

Total compensation expense over the 3-year service period (2012–2014) is
$315,000 ($7 fair value × 45,000 options). The journal entry required in each
year of the service period is as follows:
Compensation Expense ($315,000/3 years) ..............
Paid-In Capital from Stock Options .......................

105,000
105,000


The journal entry to record the exercise of all 45,000 of the options on
December 31, 2015, is as follows:
Cash (45,000 × $29) ...................................................... 1,305,000
Paid-In Capital from Stock Options............................
315,000
Common Stock .......................................................
90,000
Paid-In Capital in Excess of Par............................
1,530,000
13–33.

Probable 2014 sales at December 31, 2012...........
Options for probable sales .....................................
Fair value of options at grant date.........................
Estimated compensation expense from options..
Number of years in service period.........................
2012 compensation expense..................................

$ 450,000
20,000
× $9
$ 180,000
÷ 3 years
$ 60,000

Probable 2014 sales at December 31, 2013...........
Options for probable sales .....................................
Fair value of options at grant date.........................
Estimated compensation expense from options..
Number of years in service period.........................

Revised compensation expense for 2012 and 2013
($270,000 × 2/3).......................................................
Less 2012 compensation expense.........................
2013 compensation expense..................................

$ 550,000
30,000
× $9
$ 270,000
÷ 3 years
$ 180,000
60,000
$ 120,000


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13–33. (Concluded)
Actual 2014 sales.....................................................
Options earned ........................................................
Fair value of options at grant date.........................
Compensation expense from options ...................
Compensation expense recognized
in 2012 and 2013 ...................................................
2014 compensation expense..................................
13–34.


2013
Dec. 31

2014
Dec. 31

2015
Dec. 31

2016
Jan. 1

13–35.

$ 700,000
30,000
×
$9
$ 270,000
180,000
$ 90,000

Compensation Expense......................................
Share-Based Compensation Liability ..........
[15,000 × $6] ÷ 3 years

30,000

Compensation Expense......................................
Share-Based Compensation Liability ..........

[15,000 × $10] = $150,000
$150,000 × 2/3 = $100,000
$100,000 – $30,000 = $70,000

70,000

Compensation Expense......................................
Share-Based Compensation Liability ..........
[15,000 × $8] = $120,000
$120,000 – $100,000 = $20,000

20,000

30,000

70,000

20,000

Share-Based Compensation Liability................ 120,000
Cash ................................................................
120,000

1. Preferred Stock (6,000 shares × $14) ................................
Paid-ln Capital in Excess of Par—Preferred ....................
Common Stock (6,000 shares, $9 par)..........................
Paid-ln Capital in Excess of Par—Common.................

84,000
24,000

54,000
54,000

2. Preferred Stock ................................................................... 84,000
Paid-ln Capital in Excess of Par—Preferred .................... 24,000
Retained Earnings .............................................................. 108,000
Common Stock (24,000 shares, $9 par)........................
216,000
3. Preferred Stock ...................................................................
Paid-ln Capital in Excess of Par—Preferred ....................
Common Stock (9,000 shares, $9 par)..........................
Paid-ln Capital in Excess of Par—Common.................

84,000
24,000
81,000
27,000


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13–36.

559

1. The error would be reported as an adjustment to the beginning Retained
Earnings balance in the 2013 statement of retained earnings or statement of changes in stockholders’ equity.
2. Retained earnings, January 1, 2013 ................................
Adjustment for depreciation error in 2012 .....................

Retained earnings, adjusted, January 1, 2013 ...............
Net income.........................................................................
Dividends ...........................................................................
Retained earnings, December 31, 2013 ......................

13–37.

$ 86,500
(36,000)
$ 50,500
106,000
(30,000)
$ 126,500

(1) Calculation of number of shares outstanding:
Jan.
1
Feb. 15
May 12
June 15

800,000 shares
50,000 shares
100,000 shares (1,000 × 100)
950,000 shares
104,500 shares (950,000 × 0.11)
1,054,500 shares outstanding

Amount to be paid in dividends for the third quarter,
1,054,500 × $2.00 = $2,109,000

(2) Total dividends for 2013:
Mar.
=
June, Sept., and Dec. =

$2.00 × 850,000 = $1,700,000
3 × $2,109,000 = 6,327,000
$8,027,000

13–38. (a) Dividends (Retained Earnings)................................
Property Dividends Payable ................................
Gain on Distribution of Property Dividends ......

1,350,000

Property Dividends Payable ....................................
Investment in Bedrock Corporation Stock ........

975,000

(b) Dividends (Retained Earnings) ($6.25 × 220,000
shares).........................................................................
Property Dividends Payable ...................................

13–39. 1.

975,000
375,000
975,000
1,375,000

1,375,000

Property Dividends Payable ......................................
Investment in Great Basin Company Stock..........

1,375,000

Retained Earnings .......................................................
Stock Dividends Distributable................................
Declaration of 25% stock dividend; transfer
at stated value.

20,000

Stock Dividends Distributable....................................
Common Stock, $1 stated value ............................
Issuance of stock dividend.

20,000

1,375,000

20,000

20,000


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560

13–39. (Concluded)

13–40.

2.

The issuance of the stock dividend had no effect on the ownership equity
of each stockholder in the corporation. For each share previously held
representing an equity of $19.375 ($1,550,000 ÷ 80,000 shares), the stockholder now holds 1¼ shares, representing an equity of 1¼ × $15.50
($1,550,000 ÷ 100,000 shares), or $19.375.

3.

Retained Earnings ........................................................
Stock Dividends Distributable.................................
Paid-In Capital in Excess of Stated Value..............
Declaration of 15% stock dividend; transfer at
market value.

120,000

Stock Dividends Distributable.....................................
Common Stock, $1 stated value .............................
Issuance of stock dividend.

12,000

12,000

108,000

12,000

(a) Entries assuming that the 10% stock dividend is recorded at market value:
Retained Earnings .................................................
300,000*
Stock Dividends Distributable .........................
30,000
Paid-In Capital in Excess of Par.......................
270,000
Declared a 10% stock dividend recorded at
new market value of $60 ($66 ÷ 1.1).
*50,000 shares outstanding × 0.10 = 5,000 additional shares;
5,000 shares × $60 = $300,000
Stock Dividends Distributable..............................
Common Stock, $6 par......................................

30,000
30,000

(b) Entries assuming that the 50% stock dividend is recorded at par value:
Retained Earnings (or Paid-In Capital in
Excess of Par) .....................................................
150,000*
Stock Dividends Distributable .........................
150,000
Declared 50% stock dividend recorded at
par value.
*50,000 shares outstanding × 0.50 = 25,000 additional shares;

25,000 shares × $6 = $150,000
Stock Dividends Distributable..............................
Common Stock, $6 par......................................

150,000
150,000

(c) No journal entry is needed. A memorandum entry would disclose the
decrease in par value (from $6 to $3) and the increase in shares outstanding (from 50,000 to 100,000).


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561

13–41.

13–42.

13–43.

(a)

(b)

(d)

(g)


(h)

(i)

Retained Earnings .....................................................
Stock Dividends Distributable..............................
Paid-In Capital in Excess of Par ...........................
Declared 10% stock dividend, recorded at $21
new market value.

945,000

Stock Dividends Distributable ..................................
Common Stock, $1 par value................................
Partial distribution of stock dividend.

40,000

Retained Earnings .....................................................
Paid-ln Capital in Excess of Par ...............................
Dividends Payable .................................................

50,000
275,000

Dividends Payable .....................................................
Cash ........................................................................

325,000


Fire Loss ..................................................................
Retained Earnings............................................
To report loss from fire on the income
statement.

3,175

Goodwill Impairment Loss .....................................
Retained Earnings............................................
To report goodwill impairment loss on the
income statement.

32,200

45,000
900,000

40,000

325,000
325,000

3,175

32,200

Loss on Sale of Equipment ....................................
17,550
Retained Earnings............................................
To report loss from sale of equipment on the

income statement.
Retained Earnings...................................................
Paid-ln Capital in Excess of Par .....................
To report paid-in capital from sale of stock
as a separate stockholders’ equity item.

79,500

Retained Earnings...................................................
Paid-ln Capital from Forfeited Stock
Subscriptions..................................................
To report capital from stock subscription
defaults as part of paid-in capital.

3,725

Retained Earnings...................................................
Paid-ln Capital from Retirement of Preferred
Stock ................................................................
To report retirement of preferred stock at
less than issuance price as part of paid-in
capital.

14,700

17,550

79,500

3,725


14,700


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562

13-43.

(Concluded)
(j)

(k)

Retained Earnings...................................................
Gain on Bond Retirement................................
To report gain on retirement of bonds at less
than book value on the income statement.

8,100

Retained Earnings...................................................
Gain on Settlement of Life Insurance ............
To report gain on life insurance policy
settlement on the income statement.

7,800


8,100

7,800

The following items are correctly recorded in the retained earnings
account:
c. Stock dividend, $50,000. This amount is transferred to paid-in capital
accounts.
e. Officers’ compensation related to income of prior periods, $210,400.
This is an accounting error, and the amount is properly recorded as a
prior-period adjustment.
f. Retirement of preferred shares at more than the issue price, $28,000.
This amount is properly debited to Retained Earnings.
I. Correction of prior-period error, $31,050. This is properly recorded as a
prior-period adjustment.
The corrected amount of Retained Earnings is as follows: $95,250 + $3,175
+ $32,200 + $17,550 – $79,500 – $3,725 – $14,700 – $8,100 – $7,800 =
$34,350. Of course, the items included in the computation of net income
will eventually be closed to Retained Earnings.
13–44.

Unrealized gain on available-for-sale securities: An unrealized gain increases equity.
Accumulated foreign currency translation adjustment: Because the currencies in the countries where Radial has foreign subsidiaries have strengthened relative to the U.S. dollar, this equity adjustment will increase equity.
Contributed capital and retained earnings .......................
Plus: Foreign currency translation adjustment................
Plus: Unrealized gain on available-for-sale securities ....
Total stockholders’ equity ............................................

$417,000
72,000

95,000
$584,000


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13–45.

563

Common Stock ......................................................................... 62,500*
Paid-ln Capital in Excess of Par.............................................. 15,000**
Retained Earnings .................................................................... 12,500†
Cash .....................................................................................
90,000
Retirement of 2,500 shares of common stock.
* Common Stock: $150,000 ÷ 6,000 shares = $25 par value
2,500 shares × $25 = $62,500
**Paid-ln Capital in Excess of Par: $36,000 ÷ 6,000 shares = $6
2,500 shares × $6 = $15,000
†
Debit to Retained Earnings: $49,000 + $40,000 (net income) – $76,500 =
$12,500 amount paid over original issuance
price to retire stock.
Cash ......................................................................................
Paid-ln Capital in Excess of Par ($54,250 + $15,000 –
$36,000) ......................................................................
Common Stock (3,500 shares × $25)............................
Additional issuance of common stock.


120,750

Treasury Stock.....................................................................
Cash ................................................................................
Purchase of common stock held as treasury stock.
*300 shares on hand × $50 = $15,000
200 shares later sold × $50 = $10,000
Original purchase: $25,000 ($15,000 + $10,000)

25,000

Cash (200 shares × $55) ......................................................
Treasury Stock ...............................................................
Paid-ln Capital from Treasury Stock ............................
Sale of 200 shares of treasury stock.

11,000

Income Summary.................................................................
Retained Earnings .........................................................
Income for period closed to Retained Earnings.

40,000

33,250
87,500

25,000*


10,000
1,000

40,000


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564

13–46. 1.

Kenny Co.
Stockholders’ Equity
December 31, 2012
Common stock ($1 par, 950,000 shares
authorized, 475,000 shares issued and
outstanding)......................................................... $ 475,000*
Paid-in capital in excess of par ............................ 6,650,000**
Total paid-in capital..........................................
$7,125,000
Retained earnings..................................................
787,500†
Total stockholders’ equity ..............................
$7,912,500

COMPUTATIONS:
*950,000 ÷ 2 = 475,000 × $1 = $475,000
**475,000 × $15 = $7,125,000 – $475,000 = $6,650,000

†
$1,025,000 – $237,500 = $787,500
2.
Kenny Co.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013

Preferred
Stock
Balances,
Dec. 31, 2012 ......... $
0
Jan. 10:
Issued 100,000
shares of common stock
at $17 ..................
Apr. 1:
Issued 150,000
shares of
preferred stock
at $8 ....................
750,000
Oct. 23:
Issued 50,000
shares of
preferred stock
at $9 ....................
250,000
Net income
for 2013 ................

Cash dividends:
Preferred stock,
$0.30 on 200,000
shares.................
Common stock,
$1.00 on 575,000
shares.................
Balances,
Dec. 31, 2013...... $1,000,000

Paid-In
Capital
in Excess
of Par

Common
Stock

$

$475,000

0

100,000

Paid-In
Capital
in Excess
of Par


Retained
Earnings

Total

$6,650,000 $ 787,500 $ 7,912,500

1,600,000

1,700,000

450,000

1,200,000

200,000

450,000
1,215,000

$650,000

$575,000

1,215,000

(60,000)

(60,000)


(575,000)

(575,000)

$8,250,000 $1,367,500 $11,842,500


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13–46. (Concluded)
3.

Kenny Co.
Stockholders’ Equity
December 31, 2013
Preferred stock, 6% ($5 par, 500,000 shares
authorized, 200,000 issued and outstanding) ...
Paid-in capital in excess of par—preferred
stock ......................................................................
Common stock ($1 par, 950,000 shares
authorized, 575,000 issued and outstanding) ...
Paid-in capital in excess of par—common
stock ......................................................................
Total paid-in capital...........................................
Retained earnings...................................................
Total stockholders’ equity................................


$1,000,000
650,000
575,000
8,250,000
$10,475,000
1,367,500
$11,842,500

(Note: Disclosure of the $295,000 retained earnings restriction would be
made. Alternatively, retained earnings of $295,000 could be shown as
appropriated in the Stockholders’ Equity section.)